Build to Rent - a case of 'if you build it they will come'

Bronwen Gora // Investing // 7th May 2019

Build to rent (BTR) is taking off after much debate about whether the concept would leave the embryonic stage in Australia. Despite the continuing debate over restrictive tax policies and planning issues – not to mention different conditions to those that saw it established several years ago in the United States and the UK - developers are finally committed.

Among factors fuelling the move have been growing concerns of future housing affordability, tighter commercial yields making residential rental yields more attractive and the potential of success in the long term: a CBRE report released in 2017 into build to rent’s (BTR) viability estimated up to $300 billion worth of residential assets could one day be owned by institutional investors, creating a new asset class for larger institutional investors such as super funds as well as overseas capital. Strong support has also come from The Property Council of Australia for the new style of residence.

In simple terms, build to rent - also known as multi-family development - is where a developer retains and leases out all units in their residential development rather than selling them off.

Latest figures show 11 BTR projects underway nationwide comprising either recently purchased or soon to be acquired sites as well as those under construction. This equates to a pipeline of about 4600 apartments, the figures from Ernst & Young’s real estate advisory division reveal.

The Gold Coast’s former Commonwealth Games athlete’s village became the first BTR project to open in Australia when the Grocon-developed complex launched earlier this year. It will be followed by the Perth property Sentinel this month.

Grocon snapped up a BTR site in Melbourne’s Southbank for $35 million last year in an off-market deal and has established a new Home Residential division billed as Australia’s first fully funded BTR platform backed by a sovereign wealth fund partner.

Mirvac also stepped into the arena without hesitation starting with a search for investors in 2017 before announcing the Australian Build-to-Rent Club (ABTRC) in August last year. The aim is to expand to a portfolio of 5-6 properties in Sydney and Melbourne with reported targets of an initial 4.5 percent yield to potential investors.

Residential reset

Build-to-rent is fast becoming an attractive investment opportunity in the opinion of Mirvac chief executive Susan Lloyd-Hurwitz, who has stated that renting is now “a lifestyle choice” for people looking for proximity to work, services and amenities.

Mirvac’s seed asset Indigo is under construction at Sydney Olympic Park in Sydney's west. As typical of most multi-family developments, Indigo will be a high-quality build, with dedicated onsite leasing and management, upscale amenities, a resident program, and leading sustainability features. Mirvac remains the development, investment, and property manager.

“Build to rent is really is taking off,” says Luke Mackintosh, a partner in Ernst & Young’s real estate advisory services. “This is actually a product that is resetting residential development standards for Australia.

“It is a very different product for the consumer, yet it has been embraced elsewhere and now here as there is on-site, real-time management on these sites and better amenities.”

Changing lifestyles

Millennials (aged between 16 and 35) are forecast to make up the greatest proportion of BTR residents and help drive its expansion: surveys have found up to 66% of this demographic believe they will never own their own home. Currently, millennials make up almost a third of the 31% of Australian households that rent. With BTR’s ideally being located within 5km of a CBD, these residences cater to their needs and desires by allowing them to live near services, jobs, and entertainment. They also become ideal places to work from home, surrounded by conveniences and in a complex with fast efficient wi-fi and an on-site manager to make life easy in the instance of a leaking tap or broken fixture.

BTR is more about people management than managing buildings, Mr. Mackintosh says, with managers of multi-family residences tending to have backgrounds in the hotel sector or similar, Mr. Mackintosh points out. “Service provided to the tenants is where much of the appeal for the tenant lies,” he says. “These are not the sort of residential developments where lazy landlords neglect the plumbing or where the internet can be down for weeks. Instead of managing buildings BTR means management of people.”

Along with providing benefits for tenants, the sector is seen as a new investment avenue for real estate in expensive cities. Those who feel locked out of the home buying market could still own a slice of an income-generating rental property by investing in the funds, trusts, and companies that develop BTR properties.

As general manager of capital allocation at Mirvac Adam Hirst says, multi-family properties are not in conflict with the “great Australian dream” of homeownership. “This is not the end of home ownership or mum and dad investors.”